When is comes to doing a mortgage, it is usually is best to go with a Fixed interest rate, especially when you’re making mortgage payments. Right? But how does that come into play if it’s a Reverse loan?
It doesn’t matter unless the borrower wants to pass on a very large loan balance on to their heirs. Yeah, “fixed’ sounds really good, doesn’t it? You always know what the interest rate will be but the downside is, that on a Reverse loan that has a fixed rate, you can’t get a line of credit.
The entire amount of money that the senior will receive through their “fixed’ Reverse loan, has to be taken in in one big, large, huge amount of money. And it will immediately start to accrue interest at around 6.5% (the last time that I looked). And we are talking about compounding interest!
Many lenders and brokers are sending letters to seniors about getting a fixed rate, a “dangling carrot” so to speak. And they say what a great loan this would be for them and that they will always know what the interest rate will be, blah,blah,blah…..
Big deal! Who cares? It’s an illusion and not a really brilliant choice for a senior to use. Oh, yeah, I shouldn’t forget that they could take this money and invest it somewhere for a return. Just kidding! Now tell me, what kind of an investment would offset the interest that is being charged on the Reverse loan?
I don’t know of any.
One of my clients recently sent me two letters that she had received, touting the benefits of having a fixed interest rate on her Reverse loan. Her hand written comments were hilarious! And of course, these letters implied a sense of urgency, that she may miss out on getting a fixed rate if she didn’t call right away.
A fixed rate for a Reverse loan is a terrible choice. At the end of the loan, the balance could be huge. With the more traditional and safer HECM ( even though it’s adjustable), it’s the saner and safer choice.
The borrower is only charged interest on what they use and overall, the loan balance would be significantly smaller than if they used a fixed rate.
Until there’s an option to have a line of credit on a fixed rate Reverse mortgage, use the adjustable. In the end it will cost the borrowers and their heirs a lot less money.